Investopiedia defines Margin of Safety as:
“A principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. In other words, when market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety. This difference allows an investment to be made with minimal downside risk.”
Ben Graham refers to this as the central concept of all true investment ventures in his book, “The Intelligent Investor”.
What if we, you and I, applied that concept to all financial matters in our daily lives? What would it look like?
What Margin of Safety is there in having excessive debt, or any debt for that
matter? You want a guaranteed return of anywhere from 12-24% pay off that credit card and start using that income to build wealth and stability for yourself instead of creditors.
Cash is king baby. Don’t believe me, just try it on that next purchase. Let’s apply that Margin of Safety concept to all we may buy. You can get stuff at a “market price below its intrinsic value”. Good condition used items regularly sell for less than their worth, from cars to furniture and clothing.
What defines that Margin of Safety more than having an emergency fund in the bank? Our daily lives are fraught with risk. From injury and illness to losing an income, risk is all around us. To minimize the downside of that risk (see definition above) having 6-8 months living expenses set aside is a sound investment.
Estate planning, insurance and all that other stuff people avoid are a necessary evil to keep the intrinsic value of all you have and love safe from risk. DO IT!! You don’t have to be rich to do these things. Make a will, a trust, a medical power of attorney and make sure your insurance coverage is up to date and all the proper beneficiaries are named.
You want a margin of safety against eating dog food when you are old? Invest now. Whether you are a “Defensive Investor” or an “Enterprising Investor” getting started is the most important step.
Over time I will be going in depth into each one of these categories and sharing experience, ideas and advice (and even asking for some).
This is what Central Concept Finance is to me…